Entry Deterrence with Demand Externalities

Entry deterrence models do not deal with demand externalities introduced by entry. We treat the problem allowing for two types of entrants. One of them, the bad type, is the usual competitor who does not introduce any externality, the other (the good type) incorporates an increase in the intercept of the demand functions faced by the incumbent and the entrant. We analyses the incumbent’s behaviour in two cases ; when there is certainty or uncertainty about the prospective entrant. In both cases, the entrant fixed cost of entry. Even for the certainty case, both types would not always enter. The addition of uncertainty implies that either full entry, full deterrence or most interestingly partial entry (i.e. the good type enters) are equilibrium actions as a function of the fixed cost and the increase in demand.